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New York Law School 5th Annual Sports Law Symposium

By [Monday, January 27th, 2014]

Are Investors in Fantasy Sports Gambling on Their Legality?

By [Friday, December 6th, 2013]

BY PROFESSOR JODI BALSAM AND ALEX KOZHEVNIKOV NYLS ’14

As we head into the final weeks of the NFL season, many fans’ focus is on their own fantasy football league playoffs. Fantasy sports are a phenomenon that is gripping the nation. Nearly 30 million people participate in this obsession creating a multi-billion dollar industry. Fantasy sports have evolved as they has become more accessible with nearly universal access to the Internet and companies willing to pay to create sites to host fantasy leagues and track teams, players, and stats. In fantasy sports, participants create a dream team of real athletes and score points based on the results of their players’ in-game performances as they match up in a league against their peers. Fantasy sports have also created a huge betting and gambling industry. Most fantasy league participants throw money into a cash-prize pool that the winner or winners will get at the end of the sports season. But managing a dream team of real players could get some of these betting fans in hot water with authorities as the legality of what may be a form of internet gambling remains murky.

fantasy sportsThe federal law that regulates online gambling is the Unlawful Internet Gambling Enforcement Act of 2006. The act defines fantasy sports as a game of skill rather than chance and specifically exempts them. While the act protects fantasy leagues, players are supposed to report their winnings to the IRS. Although federal law defines fantasy sports as games of skill, many states still want nothing to do with them and state legislation on this topic is noticeably inconsistent. In most states, a game of skill is defined as one where skill is the predominant factor in determining the winner. Arizona, Iowa, Louisiana, Vermont, and Montana are amongst the “chance states that consider luck to be the determining factor for fantasy game winners, rather than skill, making those games a form of gambling. Florida’s Attorney General even issued a legal opinion that fantasy sports violate state gambling laws.  Residents of the Sunshine State caught betting money on fantasy leagues could be slapped with misdemeanors under current legislation.

Does the federal definition of fantasy sports as a game of skill make sense? Legal precedent suggests that it does. A 2007 New Jersey federal court discussed the distinction between skill and chance in connection with fantasy sports games in Humphrey v. Viacom. There a Colorado lawyer sued three pay-for-play online fantasy sites, alleging that the sites were engaging in gambling and must disgorge all entry fees paid by players. The court disagreed, but based its ruling primarily on a narrow construction of a New Jersey statute that sometimes allows third parties to recover losses from the winners in illegal gambling operations.  The court did, however, make two observations that suggest illegal gambling claims against traditional fantasy websites are not viable.  First, the court noted that fantasy website “entry fees do not constitute bets or wagers where they are paid unconditionally for the privilege of participating in a contest, and the prize is for an amount certain that is guaranteed to be won by one of the contestants.”  Second, the courtdescribed fantasy sports as games of skill, not chance, because players actively manage their teams, employing their sports knowledge and making strategic decisions.

A similar case was brought in Illinois, under its statute allowing recovery of gambling losses from the “winners”—Langone v. Kaiser and Fan Duel. Although dismissed principally on jurisdictional grounds, the court observed that a fantasy website cannot be characterized as the “winner” in a gambling contest because it risks nothing.  Rather, if fantasy games are a form of gambling, then fantasy websites merely serve as the “house,” by charging an entry fee and “act[ing] as the conduit for transmission of the prize to the winner” in a given league.

Between federal law explicitly providing that fantasy sports are not illegal gambling, and state judicial decisions that fantasy websites cannot be sued for gambling losses, traditional fantasy sports industry can probably rest easy for the moment. However, the new breed of fantasy websites—allowing users to wager high stakes on an athlete’s daily performance—continues to invite challenge as comparable to now-banned online poker. At least one major sports league—the NHL—has announced its opposition to daily fantasy sites, while the others have yet to comment.

Aside from the gambling legal issues that arise from fantasy sports, fantasy websites have had to contend with intellectual property (IP) issues in connection with the information they provide to the fantasy sport participant. Because tracking various players’ stats is essential to fantasy sports, many websites have sprung up to provide this data to the fantasy team owners. These websites provide services such as game data, player stats, hosting platforms, suggestions on players, projections, biographical information of players, and sports news, along with other information that might interest the casual sports fan. Websites such as Yahoo, ESPN, and CBSSports, all have large sections devoted to fantasy sports. Sports league websites—including the NFL, NHL, and the NBA–have  all created their own fantasy sports sections.

The sports leagues for the most part have no enforceable IP rights here—any use of their marks and logos is incidental to the news reporting function of the fantasy data site and so falls under the First Amendment “fair use” defense to a trademark infringement claim. For a time the players (and their unions) belived they had strong intellectual property claims based on the players’ rights of publicity.  Suits were brought claiming that fantasy sports providers were misappropriating player names and likenesses to gain a commercial advantage. However, fantasy news and stats suppliers have won all suits brought to date, essentially on the same First Amendment grounds that deterred the leagues from suing in the first place.

In a ground-breaking case, the Eighth Circuit Court of Appeals in CBC Distribution and Marketing v. Major League Baseball Advanced Media ruled that the information provided to baseball fantasy sports participants is information in the public domain and constitutes informative speech entitled to protection under the fair use doctrine.  The court also observed that fantasy sites’ use of player names and likenesses presents no danger that consumers will be misled to believe any particular player is endorsing the site. A Minnesota district court extended thisruling to football in CBS Interactive v. National Football League Players Association. The court described the manner in which fantasy sites present player information as “akin to newspapers and magazines, which routinely display pictures and information about . . . professional athletes.” While these rulings have deterred lawsuits by other sports, as fantasy websites evolve, and embed more advertising and other forms of commerce, players may renew their publicity rights claims that their names and images are being appropriated for an unauthorized endorsement.

All though legal battles continue to wage and the legality of fantasy sports in some contexts is murky, the industry continues to thrive. With the disappearance of online real-money poker contests (which arguably more than fantasy sports were based on skill than chance),  legislators may now set their sites on online betting on fantasy sports. However, the vast popularity of fantasy sport may just keep them legally alive. Fantasy sports have increased fan interest and  excitement in the actual sporting contests. The leagues and the players have thrived with the rise of fantasy sports, as previously uninteresting match-ups get renewed hype when they feature certain fantasy players. Fans tune into games across the nation that normally would generate little interest to follow their favorite (and most hated) fantasy players. The increased revenue for all involved in sports may ultimately trump concerns about gambling or player publicity rights.

Athlete IPOs – Not Likely to Show You the Money

By [Tuesday, November 19th, 2013]

Arian FosterImagine a scenario where you have a couple of extra dollars, you’d like to invest them, and I’m your stock broker. Fear aside, you call me to discuss your options. I ask if you’re interested in the following:

  • Mutual funds? Sorry, didn’t mean to put you to sleep.
  • Savings Bonds? Cool until the United States credit rating is downgraded – again.
  • What about a professional athlete? Good joke, but that’s not even possible.

It wasn’t – until the creation of Fantex, Inc. According to its website, Fantex “signs a contract with an athlete to acquire a minority interest in their brand and builds a plan with a goal to increase its value, leveraging Fantex, Inc.’s marketing expertise.” The company appears to be trying to publicly replicate the “investment” opportunity that private investors have had for years in sports such as golf, horse racing and boxing.

The company’s initial public offering will be for Houston Texans running back Arian Foster. Fantex is paying Foster $10 million for a 20 percent stake in his future income, including contracts, endorsements and other related off the field business revenue. The IPO will offer 1,055,000 shares of “Fantex Series Arian Foster Convertible Trading Stock” for only $10 per share. Unlike many esoteric investments available only to high-net worth individuals, Fantex offers its stock to any United States resident who is 18 years or older. The company will begin taking reservations in the next two weeks and could begin selling shares as early as next month. Recently, Fantex reached a second deal with San Francisco 49ers tight end Vernon Davis.

DavisOn its face, this seems to be the opportunity fans have been waiting for. In a way, it brings fantasy sports to life. But there are significant risks involved. Due to the JOBS Act, companies under the “emerging growth” umbrella now have more regulatory wiggle room to attract investors. Accordingly, a company like Fantex can market itself to investors more broadly and with less underlying information than the SEC previously required. This is how Fantex can advertise to investors, with little context, its ability to “buy and sell stock linked to the value and performance of a pro athlete brand.” Sounds amazing, but what is an investor actually purchasing?

The investor is purchasing what is known as a “tracking stock,” which will theoretically mirror the performance of an athlete’s brand. But in reality, prospective investors are actually buying a convertible stake in Fantex Brokerage Services. Fantex is a money-losing firm that is just 12 months old with no experience in this investment market. In its prospectus filed with the SEC, Fantex concedes, “This offering is highly speculative and the securities involve a high degree of risk.” What’s more, the company admits “investing in our Fantex Series … should be considered only by persons who can afford the loss of their entire investment.”

While there is performance risk inherent in every investment, the risk associated with Fantex is heightened. Since investors are not buying equity in Arian Foster or Vernon Davis, they have no say in how the players choose to manage their career. Rather, investors are buying shares of Fantex the company, and in doing so are relinquishing traditional shareholder rights. Comparatively, shareholders in the traditional private equity context retain the right to determine if/when shares are converted. Under the Fantex model however, Fantex controls whether the investors’ interests in Foster/Davis’ brand income will turn into company common stock. Unsophisticated investors, the exact ones Fantex targets, probably won’t take the time to read Fantex’s 150-page prospectus and likely won’t know they’ve handed over all voting rights.

Similarly, Fantex is under no obligation to pass Foster/Davis’ earnings on to the shareholders in the form of dividends. Fantex’s only duty is to itself; the company can “reattribute assets, liabilities, revenues, and cash flows” as it sees fit. Investors will likely be left out to dry even when Fantex receives 20% of Foster’s earnings. And about those earnings – while investing an athlete’s brand sounds fun, pro athletes aren’t known for making the best business decisions. Before buying into Fantex, investors really need to be asking themselves if they are willing to bet on the business judgment of Arian Foster/Vernon Davis by way of a novice brokerage company.

Further, Fantex stock can only be traded on its proprietary exchange, which means a brokerage free will be attached to any transaction and investors will not have the opportunity to trade and sell on the open market. To quote Reuters, “This investment, then, is basically the worst of all possible worlds: if Foster fails, it fails, and if Fantex fails, it also fails. And even if they both do quite well, you’ll only be able to profit on your investment insofar as a completely separate business – the Fantex stock exchange – actually works.”

Possibly the biggest concern is the more than likely possibility that the company can go bust. That’s what happened to Protrade, a company with a nearly identical concept several years ago. While Yahoo eventually bought Protrade, it did so only after Protrade moved away from investing in athletes and morphed into a developer of sports-related cell phone apps. Overall, the risk of investing with Fantex is so high that New York Magazine discussed it at length in a feature piece titled, “The Age of Bullsh*t Investing is Back!

Up until now, the coverage of Fantex has predominantly focused on the fan’s investment, but that’s not the only issue. What about the athlete? In exchange for a percentage of their brand’s future income in perpetuity, the athlete agrees to accept an upfront payment. Under this model, athletes, likely in their mid-to-late twenties, must project their long-term earning potential and conclude their brand will not generate more money than they’ve agreed to give away. Using Foster as an example, the “break even” point is $50 million – 20% of $50 million would equal the $10 million upfront payment. If his brand generates more than $50 million over its life, Foster would then be giving away 20% of his money without receiving any benefit in exchange. This is immensely problematic as Fantex’s business model is premised on exactly the opposite occurring. Since Fantex wants the investor to focus on the athlete’s brand rather than their on-field performance, it is clearly focused on what the athlete does after they retire. The “How It Works” section of their website confirms this.

It’s also worth exploring whether the athlete truly knows what’s required of them upon entering into this deal. By agreeing to a deal with Fantex, the athlete is legally bound to produce quarterly earnings reports detailing the precise amount of money his/her brand generated. Additionally, checks for 20% of those earnings must be written to Fantex. If that’s not enough, the athlete and his advisors must now become familiar with federal insider trading laws. If an athlete or a member of his financial team discusses issues that might affect his earnings, the athlete runs the risk of violating federal securities laws.

Teams and leagues will surely be wary as well, knowing Fantex plans to expand beyond football players and many questions remain. What happens if an investor “shorts” an athlete’s stock, betting against their success? If an athlete buys his/her own stock, is that any different than Pete Rose betting on his own team to win a baseball game? Will gamblers be able to influence a player’s performance? It’s not that far-fetched.  The concept of Fantex is likely not an issue that leagues and unions negotiated over during the most recent round of collective bargaining. Might they now want, or even have, to? Could express language be incorporated into a standard player contract as to whether or not this type of agreement is permissible for an athlete to enter into?

From the NFL’s standpoint, might there already be a present conflict of interest? John Elway, the Executive Vice President of Football Operations for the Broncos, happens to be on the board of Fantex. Does this mean that he has to root for the success of Arian Foster and Vernon Davis? What happens if the Broncos play the 49ers in the Super Bowl? Elway surely knows that a strong game for Vernon Davis against his team could significantly increase the long-term value of his brand. Does his integrity now come into question?

Finally, what about the companies agreeing to endorsement deals with these athletes? Nearly all of those contracts contain confidentiality clauses that prohibit either party from disclosing exactly what the deal entails. Pursuant to the Fantex agreement, an athlete must fully disclose all deals that represent more than 10% of their “brand income.” Looking forward, if an apparel company wants to agree with Andrew Wiggins, the presumptive #1 pick in the 2014 NBA draft, on an endorsement contract comparable to the one’s signed by Derrick Rose and LeBron James, will that company grant a release from the confidentially clause and permit full disclosure so Fantex can accurately determine how successful that athlete’s brand is? Not likely.

At this point, the idea of Fantex leads to more questions than answers, and the questions posed merely scratch the surface. But with Fantex facing long odds, it’s likely they won’t need to be answered. However, if it beats the odds, it sure would be fun seeing a ticker flash: “Arian Foster 10.51 .50 (5.01%).”

 

ROLL TIDE…Alabama Artist in Danger of Being Sacked

By Steven Ward [Monday, April 9th, 2012]

Daniel Moore with one of his University of Alabama football paintings

Imagine you are an alumnus of the University of Alabama and obviously a big fan of their Crimson Tide football team.  If you were to purchase a painting that depicted running back Trent Richardson rushing for a touchdown in this year’s BCS National Championship Game, would you think that the painting is licensed by the University? This is the argument that The University of Alabama, along with vigorous support from colleges across the country, is making in a court battle that will be settled soon by the 11th U.S. Circuit Court of Appeals.

As explained in a recent New York Times article outlining the case, Daniel Moore has been painting pictures of the Alabama Crimson Tide football team for over 30 years without a license from the University to do so. His paintings are original but depict scenes from the team’s history incorporating the players and their uniforms in the artwork. Mr. Moore sells both original paintings and reprints ranging in price from $35 to $3,000.  Alabama objects to his use of the team’s uniform and colors in the pictures claiming trademark infringement. The District Court ruled in favor of Mr. Moore for purposes of the paintings and reprints but barred him from using the images on other memorabilia. While the New York Times article outlined some of the history of the case and the stance of the opposing parties, it did not indicate the strength of their arguments or suggest who may win on the appeal. We will do so here.

Read More…

Judge Blocks Access to NCAA Documents

By John Kelly [Saturday, February 11th, 2012]

Recently, a San Francisco Federal judge blocked an attempt by former NCAA athletes to obtain “highly sensitive” TV sports contracts and other documents concerning a class action lawsuit that alleges that the NCAA and its affiliates are unfairly profiting off of athletes images.  This class action in San Francisco, along with a few other related cases going on around the country, alleges a conspiracy in which the NCAA forces collegiate athletes to relinquish their rights while various corporations earn billions of dollars off of their talent and likenesses.  The motion, if granted, would have compelled many “outside” licensing entities including the videogame publisher Electronic Arts, and networks such as FOX and TBS to produce highly sensitive internal information regarding their dealings with the NCAA and its conferences.  The court found compelling Fox’s argument that producing such documents would be extremely burdensome.  The question now is, how big of a blow is this ruling to the plaintiffs’ case?  If the sought-after documents actually exist and are the keys to any valid claim by plaintiffs, this has to be a substantial blow, and possibly the death knell to any chances the plaintiffs had.